A detailed map for financial inclusion

The report of the Reserve Bank of India (RBI)-appointed Committee on Comprehensive Financial Services for Small Business and Low Income Households has been placed on the central bank’s website for comments.

Considering the voluminous nature of the report and even more pertinently its complex and, detailed treatment of the subject, the deadline for receiving comments, now set at January 24, would, in all probability, need to be extended.

The report packs a lot of recommendations for furthering financial inclusion and deepening. Its chairperson Nachiket Mor, a commercial banker turned strong votary of inclusive practices is a member of the RBI’s central board.

Other members of the committee are from financial institutions, banks — both public and private — non-banking finance companies (NBFCs), rating agency and microfinance institutions.

In the event, the report is a gold mine of information and action points. Some of these are not new but the committee’s breath-taking ‘visionary” statements can be faulted as being too theoretical.

Key question

The key question is whether some of its key recommendations can be implemented at all and that too in the timeframe suggested.

In fact, two of its members, Shikha Sharma, Managing Director and CEO of Axis Bank, and S. S. Mundhra, Chairman and Managing Director of Bank of Baroda, have submitted additional points to the report.

Basically, in the nature of dissenting notes, they have suggested a more relaxed timeframe to execute a few key recommendations.

The committee’s terms of reference are comprehensive. They include (1) to frame a clear and detailed vision for financial inclusion and financial deepening, (2) to lay down a set of design principles that will guide the development of national frameworks and regulation for achieving financial inclusion and development, (3) to review existing strategies and develop new ones that address specific barriers to progress and that which encourage participants to work swiftly for inclusion and financial deepening consistent with design principles, and (4) to develop a comprehensive network for monitoring financial inclusion and deepening efforts on a nationwide basis.

Key recommendations

The committee has suggested providing a universal bank account to all Indians above the age of 18 years. This target is to be achieved by January 1, 2016, less than two years from now.

To enable this, a vertically differentiated banking system with payments banks for deposits and payments and wholesale banks for credit outreach. These banks need to have Rs.50 crore by way of capital, which is a tenth of what is applicable for new banks that are to be licensed.

The Aadhaar will be the prime driver towards rapid expansion in the number of bank accounts.

For credible monitoring, the committee has laid down certain norms even at the district level such as deposits and advances as a percentage of gross domestic product (GDP).

The committee proposes an adjusted 50 per cent priority sector lending target with adjustments for sectors and regions based on difficulty in lending.

It advocates fewer NBFCs and substantial regulatory convergence for them with banks on non-performing assets and the extension of securitisation laws to certain NBFCs.

A state-level regulatory commission will consolidate supervision of all non-governmental organisations and money service businesses.

Justified ambition but not realistic

The committee does not lack ambition. Its proposal for universalisation of bank accounts — every adult citizen to have a bank account by January 1, 2016 with the Aadhaar as the prime driver, is certainly an outstanding example.

The committee has, in fact, laid down a distance rule — no one need walk for more than 15 minutes to reach a point of contact.

Not only the accelerated timeframe but the apparent glossing over the huge costs in creating infrastructure and staff expenses is a point of contention.

The idea of setting up differentiated banks is not new but setting up a few of them at the present juncture might pose practical problems. Even the reduced capital requirements might be a barrier.

Their commercial viability might not be clear at the outset. There is also a question of recruiting trained and retaining trained manpower, especially in areas which are not covered by any financial institution.

Previous attempts at creating differentiated banks such as the regional rural banks and local area banks failed because their operating costs rose to the levels prevailing in commercial banks. Technology might, of course, reduce costs but it is not certain that its benefits can be assimilated so soon, as indicated.

Piggy backing on the Aadhaar to open bank accounts seems a good idea. However, the Aadhaar has to overcome glitches and win legislative approval.

These points of criticism, however, do not detract from the overall merits of the report, whose primary purpose seems to be to make everyone think afresh. Debates and contrary views will enhance the quality of the final report.

Money is no object to a money creating nation. If banks cost more to build so be it. People who build it benefit and the GDP goes up. Every post office can be a bank with a secure kiosk for ATM transactions. An ATM card issued to all or a biometric card will work. You can start with a universal income to all, say, Rs 5000 per year per person payable monthly by ATM cards updated monthly. People will get used to banking and there will be no more poverty. The updating can be done by a postman on a bicycle in rural ares. Where there is a will there is a way! This is the Swiss method proposed to give a universal salary as a minimum income ( 2800 dollars in Swiss currency). Perhaps India can beat them to it.